Cryptoeconomics is not economics for crypto

Cryptoeconomics is one of the most exciting aspects of crypto and it doesn’t mean a simple adaption of economics to cryptoassets, as many naturally think. There are many new possibilities, which Josh Stark writes about in an overview of cryptoeconomics at CoinDesk:

In simple terms, cryptoeconomics is the use of incentives and cryptography to design new kinds of systems, applications, and networks. Cryptoeconomics is specifically about building things, and has most in common with an area of mathematics and economic theory.

Cryptoeconomics is not a subfield of economics, but rather an area of applied cryptography that takes economic incentives and economic theory into account. Bitcoin, ethereum, zcash and all other public blockchains are products of cryptoeconomics.

He begins by using Bitcoin as an example:

Bitcoin’s innovation is that it allows many entities who do not know one another to reliably reach consensus about the state of the bitcoin blockchain. This is achieved using a combination of economic incentives and basic cryptographic tools.

Stark explains that cryptoeconomics is more closely related to mechanism design than economics.

Mechanism design is often referred to as reverse game theory because we start with a desired outcome and then work backwards to design a game that, if players pursue their own self interest, will produce the outcome we want.

Stark includes examples of three different examples and concludes by discussing the difference between a centrally-managed blockchain and a truly decentralized blockchain.

Blockchains that are simplydistributed ledgers and do not rely on cryptoeconomic design to produce consensus or align incentives might be useful for some applications. But they are distinct from blockchains whose whole purpose is to use cryptography and economic incentives to produce consensus that could not exist before, like bitcoin and ethereum. These are two different technologies, and the clearest way of distinguishing between them is whether or not they are products of cryptoeconomics.

Secondly, we should expect that there will be cryptoeconomic consensus protocols that do not rely on a literal chain of blocks. Obviously, such a technology would have something in common with blockchain technology as we call it today, but labelling them blockchains would be inaccurate.

Lots more in his article on cryptoeconomics.

Are ICOs Are ‘Attracting the Wrong People’?

CoinDesk reported on comments about BitCoin and ICOs by Joi Ito, MIT Media Lab Director

Ito told the crowd:

“The problem is we’re creating a system where people can pump or dump and speculate. Anyone who has issued an ICO needs to sit down and meditate: are you making society better? Or are you making money unfairly?”

In contrast, Ito framed the “whole point” of cryptocurrency as being about using technology to prevent the societal ills he believes have resulted from economies defined by government-issued currencies and the financial institutions necessary for their use.

He included what he’d like to see:

Ito espoused the idea that cryptocurrencies should think more about their intent than their value, with one of his examples focusing positively on the insular economies of online role-playing games as an example of how restrictions can heighten an asset’s worth.

And clearly feels Bitcoin is doing things right while ICOs are missing the point:

“We haven’t won the battle yet. [But] I think the thing that is interesting is that Bitcoin Core has substantially more brain fire power than any of the other networks.”